Senate Finance Committee Examines International Tax Reform

The Senate Finance Committee (SFC) held an October 3 hearing on international tax reform. The goal of the hearing, according to the committee, was to examine how Congress can update the U.S. system of taxing cross-border income to create more jobs and investment in the U.S.

SFC Chairman Orrin G. Hatch, R-Utah, started the hearing by addressing the recent unified tax reform framework released by the Trump administration and top congressional leaders (TAXDAY, 2017/09/28, C.1). More specifically, Hatch remarked upon a recent Tax Policy Center report that offered a preliminary analysis of the framework and estimated a sharp increase to the federal deficit.

According to Hatch, it is not yet possible to make conclusions about the GOP framework when so many other important variables that go into the tax reform overhaul have yet to be released or even decided upon, such as the break point for the individual tax brackets, a precise rate for the top bracket, and other important pieces of information, Hatch noted. Without these details, “there is simply no way for any outside party to produce a credible analysis of the framework, let alone a detailed estimate of revenue and the distribution of tax burden,” he added.

“The Republican tax framework okayed the entire corporate wish list—a massive rate cut, a pure territorial system,” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “It’s not hard to predict what will happen if this multi-trillion dollar tax giveaway to the wealthy and corporations is enacted, our tax base continues to erode, and the deficit skyrockets.”

Several Democratic lawmakers, including Wyden, also expressed concern about the lack of details in the GOP framework on anti-base erosion protection measures to be implemented in the tax code overhaul. According to Itai Grinberg, professor of law at Georgetown University Law Center, one particular anti-base erosion proposal that has received significant consideration by Congress in the past is a form of minimum tax built onto the infrastructure of subpart F and used to reach intangible income. Grinberg cautioned lawmakers against this proposal, however, stating that it would essentially continue to discourage U.S. tax residence and encourage foreign tax residence for cross-border businesses. “Unlike an inbound corporate minimum tax, such proposals target U.S. [multinationals (MNCs)] and only U.S. MNCs. In effect, a minimum tax imposed on only U.S. MNCs is just a worldwide system with a lower rate for foreign source income than domestic source income,” Grinberg testified. “No other country on Earth has such a system,” he added.

Instead, the most effective anti-base erosion proposal would be to lower the corporate tax, rather even further to beat global competitors, Grinberg said. “The most plausible approach to accomplish such an achievement would be to adopt a value-added tax and use the revenue to sharply lower both corporate and individual income tax rates,” he advised. Sen. Benjamin Cardin, D-Md., has long been a supporter in the SFC of a form of value-added tax, which he has referred to as a consumption tax.

According to Kimberly A. Clausing, a professor of economics at Reed College, a per-country minimum tax would be a significant step toward reducing profit shifting toward tax havens, as well as protecting the corporate tax base, however. “A minimum tax would currently tax income earned in the lowest tax countries,” she told lawmakers. “Ninety-eight percent of the profit shifting out of the United States is destined for countries with foreign tax rates below 15 percent,” she added.

Sen. Rob Portman, R-Ohio, told members and witnesses that inversions are the “tip of the iceberg,” and that the real problem is acquisitions. “In 2016, foreign acquisitions of U.S. companies was over three times greater than U.S. acquisitions,” he said. According to Portman, citing an Ernst & Young (EY) study, 4,700 companies would be American companies today if the U.S. had a territorial tax system and a 20-percent corporate rate.